Educational Articles

Among the many features found in each week’s edition of Value Line’s Selection & Opinion service is a list of the seven best and worst performing industries over the past six weeks. These rankings can be found on the inside back cover of Selection & Opinion. The roughly 1,700 stocks in the Value Line universe are currently divided among about 100 industries. Notably, for the purposes of calculating these results, the performance of each stock is equally weighted to the others in its industry (i.e., irrespective of market capitalization).

The six-week period covered in our latest Industry Price Performance rankings was a turbulent stretch for equities. The market spent most of January in the red, but has recovered nicely in subsequent weeks. Of the leading domestic equity benchmarks, the Dow Jones Industrial Average posted a modest 2% loss for the period between January 7th and February 18th, but most of the others were able to claw back all of their early losses and finish at breakeven or modestly in the black over this stretch. From an industry perspective, our best and worst performing lists showed very distinct sector themes. In particular, the healthcare sector dominated our top seven, holding down four of the top spots. Biotechnology shared the top spot with Precious Metals, as both rose 17.8%. In addition, the shares of Drug (+11.7%), Healthcare Information Services (+11.0%), and Pharmacy Services (+7.5%) companies have also been in hot demand so far in 2014.

At the other end of the spectrum, retail-related stocks, which are part of the Consumer-Cyclical sector, were pummeled by investors. Retail (Softlines) had the toughest time, declining 11.1%, while the Retail (Hardlines) and Retail Store groups, down 10.7% and 7.9%, respectively, fared only marginally better. In seeking out investment ideas this week, we are rummaging through these out-of-favor industries in search of bargains. We found many retail-related issues that offer good price appreciation potential to 2017-2019, based on their current valuation. To avoid a head-on confrontation with the negative market sentiment that now prevails, we are focusing on the handful of stocks in this space that have been able to hold their ground or even pick up additional investor support so far in 2014. This small group includes Abercrombie & Fitch (ANF), Fossil Group (FOSL), and The Gap Inc. (GPS), which all appear to worthy of consideration by long-term investors. Of these we are taking a closer look today at The Gap.

The Gap Inc. owns and operates more than 3,000 casual apparel specialty stores. Franchisees operate another 350 stores. The retailer sells jeans, sweatshirts, sweaters, and related apparel through its Gap and GapKids stores, which can be found in about 1,200 locations worldwide, including roughly 1,000 in the U.S. The Banana Republic chain (about 650 stores) features upscale casual wear, while the Old Navy concept (about 1,000 stores) sells budget-priced clothing. The company also generates about 12% of its sales via the Internet.

While The Gap won’t report final results for fiscal 2014, which ended February 1st, until February 28th, it did provide a preview earlier this month that was well received by the market. For starters, same-store sales in the January quarter increased 1% year over year, a solid achievement in what was a generally unexciting holiday season for most retailers, particularly those that generate most of their business at brick-and-mortar locations, rather than over the Internet. The company also indicated that share net likely reached $0.65 to $0.66, down 10%-12% from the prior-year period, but ahead of our estimate of $0.63. Full-year earnings probably totaled about $2.72-$2.73, an increase of 17% from the fiscal-2012 tally of $2.33. We are optimistic profits will continue to climb in 2014, likely advancing at a low double-digit pace, to $3.05.

Gap stock fell out of favor with the market during the second half of 2014, amid signs of a more challenging retail sales environment. Investors have taken a more positive stance since the January-quarter preview, with GPS shares climbing nearly 10% year to date. At the current price, we expect this equity to produce above-average price appreciation in the 3 to 5 years ahead, based on our projection of annual earnings growth of roughly 10% to 2017-2019. The stock also provides a decent measure of income. The current yield of 2.0% is equal to the Value Line median, and we expect the payout to increase at least in line with profits going forward. GPS shares carry a Safety rank of 3, suggesting an Average level of risk.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.